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Fed’s Decision Should Push Mortgage Rates Down For Now

In an economic environment that has been slow to recover since officially coming out of the recession in June 2009, the Federal Reserve’s bond-buying program has been a driving force in pushing interest rates down to historic level. In early May, rates on a 30-year fixed mortgage dipped to 3.35 percent. At the end of the month the average rate increased to 3.81 percent.

When the Fed announced that it would likely begin trimming the bond-buying program later this year, worried bond investors took bond market went into a state of flux. This uncertainty in the market propelled mortgage interest rates into an upward trajectory anticipating changes in the program.

Today, the average interest rate is around 4.5 percent. The hike in interest rates adds an extra $132 per month for a borrower with a $200,000 30-year, fixed rate home loan.

Bond-buying program left alone

The decision by the Fed not to change course and continue funding its $85 billion a month program surprised nearly everyone. Many economists had expected some action by the Fed. On analyst anticipated about a $10 billion reduction, some economists even recommended cutting just Treasures-- instead of mortgage-backed securities-- to have less of an effect on the housing market.

In you are thinking about buying a home or plan to refinance your mortgage, the Federal Reserve’s unexpected announcement comes as good news. It means that a key component to the housing market recovery stays on course.

The most immediate benefit: the market gains some wiggle room, which is necessary for mortgage rates to start falling again.

What influenced the decision?

The Federal Open Market Committee (FOMC) serves as the policy-making arm of the Federal Reserve. After wards, its monthly, two-day meeting concluded on Thursday, the FOMC released it greatly anticipated statement.

It seems that the recent parade of mixed economic data, including Gross Domestic Product, Employment Situation, Retail Sales and other reports showed that the economy has not made the level of improvement necessary to sustain economic growth and increase the rate of hiring. As a result, the Fed simply chose to wait for data that point to a sustainable and stronger economy before scaling down the program.

Nearly 24 hours after the Fed’s statement, Freddie Mac’ Primary Weekly Primary Mortgage Market Survey reveals that the 30-year, fixed rate mortgage declined from 4.57 percent to 4.5 percent. This occurred—not in response to the FOMC’s decision, but as a reaction to the economic data that led to the pronouncement, according to Frank Nothaft, the chief economist and vice president of Freddie Mac.

Maintaining perspective on mortgage interest rates

With the home buyers and persons interested in refinancing focused on rising interest rates, many market watchers and policy makers are quick to point out that interest rates are still low based on historical averages. For example, during the housing boom leading up to the Great Recession, mortgage interest rates stayed in the 6 to 7 percent range.

Even with the Fed’s decision, as the economy gains strength it’s only natural for mortgage interest rates to increase.

Nothaft predicts that mortgage rates will climb to about 5 percent by mid-2014. That would translate into a $24 increased in monthly mortgage payments for each $100,000 borrowed. This would affect a small number of borrowers on the cusp of being able to afford a home. Nothaft does not expect higher rate at this level have a noticeable impact on demand.

The bottom line: making a decision to buy a home or refinance an existing mortgage must look at mortgage rates as well as other factor that influence the housing market and general economy.